As you may have noticed by the advertisements, a currently popular trend in retirement planning is to calculate “your number.” This refers to the amount of savings you need to have at retirement. From a marketing perspective, “your number” attracts consumers who prefer simplicity and an easily defined goal, but from a financial perspective, “your number” does not address all the dynamic variables of retirement planning. Retirement planning is more complex than just a number.
Retirement planning is a process that continues over your lifetime, not a one-time occurrence. You cannot calculate “your retirement number” now and carry that same number around for years expecting it to remain static until you retire. During your lifetime, “your number” will be affected by many variables that can unexpectedly change, such as incomes, expenses, savings rates, tax rates, inflation rates, asset allocations, and investment performance. Your retirement plan should be updated and modified as these changes occur so that you can adjust the other variables to maintain an acceptable probability of reaching your goals.
Retirement planning allows you to map a course of actions from now until your death. Just knowing “your retirement number” is like having a destination without having directions. You need directions such as how much to save and where to invest in order to reach your goals. You should also recognize that death, not “your number,” is the ending destination point in your retirement plan. Even though you might reach “your number” by retirement, you could still run out of money before death if variables such as inflation rates, investment returns, and portfolio withdrawals are different than planned.
The advertising of “your number” has been beneficial for retirement planning awareness, but consumers should recognize that just calculating “your number” is not an adequate substitution for a comprehensive retirement plan. A retirement plan should be developed, implemented, monitored, and modified as needed over your lifetime to help you achieve your goals. If you would like help with this process, please consult with a CFP® professional who provides financial planning services.